Don't ignore tax-saving mutual funds in a beaten-down equity market

Investors are shunning equity-linked savings schemes (ELSS), or tax-saving mutual fund schemes, this tax planning season, say investment advisors. According to them, investors have invested a measly Rs 200 crore in the first four months of the tax saving season, which starts from October to March.

A lacklustre stock market, attractive returns from alternative investments in debt and the 'confusion' about the status of ELSS after the implementation of Direct Taxes Code (DTC) have contributed to investor apathy towards these schemes, which served as the introduction to stock market for many retail investors. Though investors' decision may look solid from the short-term perspective, they may be letting go of a chance to create wealth in the long-term by eschewing tax planning MFs, say investment experts.

"Those who have been investing in these schemes regularly through SIPs (systematic investment plans), as part of their financial plans, have been continuing with their investment. But those who invest lump sum in these schemes at the last minute as part of their tax planning strategy are not enthusiastic about them anymore," says Hemant Rustagi, CEO, Wiseinvest, a wealth management firm.

"However, more than the subdued market and better debt options, it is the confusion about the DTC which is really bothering investors."

According to experts like him, investors are in a quandary as they don't know for sure whether DTC would be implemented next year or whether ELSS would find a place in the final list of investments that qualify for tax deduction under Section 80C of the Income Tax Act. As per the original proposal, ELSS won't qualify for tax deduction after the introduction of DTC. However, there are unconfirmed reports that the MF industry is lobbying for the continuation of the benefit to ELSS.

"It is a huge problem. Since most people are not sure whether ELSS would continue to exist next year, they are hesitant to make fresh investments in them. Also, since the stock market hasn't given any meaningful returns in the short term, it is difficult to convince them otherwise," says a mutual fund advisor. According to investment consultants, the rebound in the stock market in the recent past hasn't boosted investor sentiment.

A Case for ELSS Investment

"The smiles are back on many faces in the market, but the market has improved very fast. There is still some confusion about the future course of the market," says Mukesh Dedhia, director, Ghalla & Bansali Securities, a wealth management firm.

"Though investors have nothing per se against ELSS, they don't have the confidence to invest in stocks. Also, you can get assured returns of 8%-plus in alternative investments available under Section 80C," adds Dedhia.

Investors, especially conservative ones looking for assured returns plus safety of capital, can invest in public provident fund (PPF) or five-year bank fixed deposits to claim tax benefit under the same section that also covers ELSS.

Is it a mistake?

"Sadly this is the best introduction possible to the stock market for retail investors, especially the first-timers," says Rustagi.

"The tax benefit plus the three-year lock-in period act as a perfect way to weather the volatility in stock market. Unlike other funds, you won't be tempted to book profit after a short period and get out of the market if it goes down. In that sense, it prepares investors for a long-term in the market," he adds.

Mukesh Dedhia says, unfortunately retail investors in India don't realise that when the market is down it is the right to invest in stocks.

"Sadly, investors end up doing exactly the opposite. When the market is very high, people start investing more and more in equities and they run away when the market starts going down. That is why they end up losing money in the market," Dedhia says.

"I would still recommend ELSS to investors who are ready to take the risk and time to wait for the returns." The returns generated by these schemes in the long term underscore the point (See table).

For example, the best performer returned around 13% in the last five years. As you would agree, that is something your debt investments can't offer you in the long term.

What should be the strategy

To begin with, ask yourself whether you can stomach the uncertainty and volatility in the stock market. Two, can you handle a depressed stock market even after the mandatory lock-in period? According to investment experts, this is crucial because investors should get into the stock market only if they have time in hand. "If you are used to the stock market, go ahead and invest.

However, if you are a first-timer, be sure whether you can handle the volatility," says Rustagi. "As for first timers, I will ask them to invest the money in two or three tranches in the next one month when the market is a bit down. It may prove beneficial as the market has already gained much this year," adds Rustagi.